U.S. Shale Has Hindered OPEC’s Grip On Global Oil Markets

It seems that the Organization of the Petroleum Exporting Countries (OPEC) can no longer control the global oil market. Despite the recent announcement that OPEC was cutting oil supplies by some 700,000 barrels per day, which represents a 2.5 percent decrease in daily production, the market did not flinch. The price of oil raised by a mere 5 percent most likely due to oil and gas reserves evaluation figures that include U.S. shale production.

OPEC’s move was meant to shore up the sagging economies of its member nations. The three countries most affected by U.S. shale production have been Saudi Arabia, Venezuela and Kuwait. They have all felt the pinch deeply, and their economies are in freefall. Petroleum economics courses have historically declared that such a reduction would affect the market more substantially, but that is not the case any longer.

In the 1970s, OPEC raised their prices by 70 percent and stopped selling oil to the U.S. and the Netherlands. This was because those countries were selling weaponry to Israel to use in the Yom Kippur War with its neighboring nations. That was when OPEC was responsible for 70 percent of the world’s oil production according to oil and gas training courses.

Increases in U.S. shale oil production have sharply curtailed OPEC’s power. New methods and innovative approaches to harvesting shale oil have increased U.S. production from around 5 million barrels per day in 2006 to 9.6 million in 2015. Although the OPEC cartel still owns nearly 80 percent of the global oil reserves, it only accounted for a little more than 40 percent of global production.

OPEC simply cannot control the industry when its market share is in decline. Countries all over the world depend on oil for the private and public sectors. When the price declines, the natural impulse is to pump more oil. When OPEC did this, it had a counterproductive effect. Prices went down further. Now, OPEC is responsible for only one-third of the world market.

The rise in U.S. production has prevented OPEC from keeping its stranglehold on the market. U.S. oil companies have been able to weather price drops because it does not cost as much to harvest oil from shale as it once did. Reduced production costs have enabled these companies to keep pumping oil at lower break-even points. Cutting production by 700,000 barrels per day only resulted in a reduction of 1 percent of daily global use, which is not going to have the kind of impact that OPEC had hoped to achieve.